Discusses Chapter 11 bankruptcy issues and issues with business reorganization.

Monday, August 3, 2015

The Magic Behind the Confirmation Order in Chapter 11

The Magic Behind the Confirmation Order in Chapter 11

The goal of any Chapter 11 bankruptcy case, whether
individual or business is simple: get the plan confirmed. The process of
negotiating with creditors, making personal budgets, and filling out those
pesky monthly operating reports all have the end goal of making a Plan of
Reorganization that is fair, reasonable, and most importantly, feasible for the
client to complete. But what effect does the confirmation order actually have
on the case? What does this mystical magical confirmation order allow to happen
if the Debtor defaults? These answers sometimes, are not so clear, even to
attorneys.

The confirmation order is the crucial point in the
bankruptcy case when plan payments begin, and all the agreements between the
debtor and creditors start over. The Chapter 11 Plan creates a new contractual
relationship between the debtor and creditor, and the treatment that is
provided for in the plan are the new terms. In
re Winn-Dixie Stores, Inc. 414 B.R. 764 (M.D. Fla. 2009). The agreement the
creditor and debtor had before the confirmation is erased, and the new
agreement is controls.

With this in mind, there are really three ways that a debtor
default can be dealt with: 1) the case can be re-opened and dismissed; 2) the
case can be converted to a Chapter 7 liquidation case; or 3) the contract can
be litigated in state court. Generally, courts are reluctant to re-open cases.
Good cause must be shown, and usually pretty compelling circumstances have to
exist for a court to allow a case to be re-opened. There are two ways cases can
be converted, voluntarily or involuntarily. The bankruptcy code, under 11
U.S.C. §1112(b) allows creditors to request that the case be converted if
certain circumstances exist, some of which include material default with
respect to a confirmed plan, inability to effectuate a plan of reorganization,
failure to file tax returns or pay post petition taxes, among several others. It
is important to note that with both conversion and dismissal, the court looks
at the best interest of the creditors, not the debtors, and creditors are not
afraid to pursue these avenues when a debtor has not made plan payments.

The third option relies on the fact that a new contract is
created between the creditor and debtor. Because the Chapter 11 plan and
subsequent confirmation create a brand new contract, creditors can absolutely
pursue action in state court. This means that foreclosure actions can commence,
default judgments can be entered, and the creditor can pursue all legal
remedies they were prevented from pursuing while the debtor was protected by
the bankruptcy.

Bankruptcy is a long and often difficult process, and is not
entered into lightly. A lot of debtors come to us and choose chapter 11 to
protect themselves from foreclosures, or liquidating. While the primary goal of
any chapter 11 is to get the case confirmed, there is no point to confirmation
if the debtor defaults. The moral of the story is to make sure the plan
proposed is feasible for the debtor, and that the debtor makes plan payments so
that the event of a default is not even a concern.

By: Samantha Marriott, Attorney at The Law Offices of Jason A. Burgess, LLC

If you have questions about this or anything else please give us a call at 904-354-5065 or email us at jason@jasonAburgess.com